Some of the workers need to submit a Self-Assessment tax return per year, such as sole traders. With this information, HMRC estimates how much tax is due. If your Self-Assessment tax bill meets the cap, then HMRC will ask you to make account payments.
The deadline for filing the self-assessment tax return for 2018/19 is 31 January 2020. This is also the date by which any outstanding tax for 2018/19 must pay. Thus, where payments need to be on the account. The date by which the first Payment on Account of the 2019/20 liability is due is a must.
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What is a Payment on the Account?
A payment on account is an advance payment towards a taxpayer’s tax and Class 4 National Insurance bill, where payments on account are due. The tax is payable in two instalments: on January 1 of the tax year and on July 31 of the tax year.
Payment on Account is based on the previous year’s liability. It is not an exact science; there may be more tax to pay, or the taxpayer may have paid too much. Any balancing payment is done on 31 January after the end of the tax year. If the taxpayer has paid too much. Then, the excess will be set against the next year’s payments on account or refunded if none are due.
When Payment on the account has done?
Payments on the account have done where tax and Class 4 National Insurance for the previous tax year was £1,000 or more. Unless at least 80% of the tax owed has deducted at source, for example under PAYE.
Payments are not required when tax and Class 4 National Insurance bill for the previous year was less than £1,000.
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Calculating the Payment on account
Each payment on account is 50% of the previous year’s tax and Class 4 National Insurance liability. Class 2 National insurance premiums are not included when calculating the plan payments. It should pay in full by 31 January after the end of the tax year.
Richard is a sole trader. In 2018/19 his profits from self-employment were £30,000. He has no other income.
His income tax liability for 2018/19 is £3,630 (20% (£30,000 – £11,850)). Thus, his Class 4 National Insurance liability is £1,941.84 (9% (£30,000 – £8,424).
His combined tax and Class 4 National Insurance liability is thus £5771.84.
As this is more than £1,000, he must make payments on account of the 2019/20 tax year of £2,785.92 on 1 January 2020 and 31 July 2020. Each payment is 50% of the previous year’s liability of £5771.84. If the liability for 2019/20 is more than £5,771.84. Then, the balance is paid on 31 January 2021, together with the Class 2 National Insurance for 2019/20.
Beware fluctuating years
Where the tax and Class 4 liability is under £1,000 one year but not the next. The payments can fluctuate may hit the taxpayer hard.
Tim has a tax and Class 4 National Insurance liability of £900 in 2017/18. As a result, he is not required to make payments on account for 2018/19. But, 2018/19 is a good year and his tax and National Insurance liability are £4,000. As payments on account were not made, the amount is due in full by 31 January 2020. Also, because it is more than £1,000, he must make payments on account for 2019/20.
As a result, he has to pay £6,000 on 31 January 2019 – the full liability for 2018/19 (£4,000). Thus, the first payment on account of £2,000 (50% of £4,000) for 2019/20. The second payment on account for 2019/20 of £2,000 is due by 31 July 2020.
Reduce payments on account
If the taxpayer knows that income in the current year will be less than the previous year. Then they can ask HMRC to reduce the payments on account. But, interest is charged on the shortfall if the payments are reduced below the level they should be.
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Extra note: TMA 1970, s. 59A